Professor John FitzGerald:

Deputy Durkan made a good point that the UK referendum is on the agenda for the next five years and it is bad for them, for Europe and for us. Also, Deputy Eric Byrne asked whether anyone in the UK had examined the implications, and I am afraid it might be the case that they have not. I asked two colleagues in the United Kingdom whether they were studying the issue and both said that they would not go near it. In order to understand the implications for us we need to understand the implications for them. For instance, BAE Systems in Bristol and Nissan in the north of England are at risk, as are many other firms. My suspicion is that when these companies think about it, and if I am right about their being at risk, there will be change in view and, hopefully, a more realistic response.

No more than ourselves, Britain needs a national debate. We know about having national debates on these issues for referendums. Britain may need to try twice to get the right answer but it has a lot of work to do. What can we do about it? That is a scary question. Barring acting like a marriage counsellor and trying to reconcile two warring parties, Ireland must examine the matter as an insurance policy and examine whether we can do anything. For example, there has been talk about major investment in Ireland in wind power in order to export it to the United Kingdom, but the concern is as follows. Let us say €3 billion is invested in Ireland in order to help Britain meet its EU obligations under the renewables directive, but Britain then changes its mind. Are we left with €3 billion worth of dud windmills? Contracts that are enforceable in London are needed in order to guarantee such investment. We need to start thinking about how to protect ourselves from such a hopefully limited possibility.

In terms of co-ordination and whether we are serious about the co-ordination of fiscal policy at a European level, we have been forced to go down that route because, for understandable reasons, the people who lent the money want to be certain that they will get it back. That is a fair cop. I spoke to one colleague who is a very good German economist. When he was faced with the idea that Europe had to regulate French fiscal policy he said that he did not want to go near it. When one comes down to it, each country wants to protect its own independence in this regard. If we want to go down the co-ordination route then we must examine the issue of a co-ordinated fiscal response to a crisis like the current one. If one is going to have all sorts of regulation regarding fiscal policy then one must have regulation that will ensure the one acts counter-cyclically and not pro-cyclically within Europe.

Senator Healy Eames raised the issue of a banking union. It is a long-term issue but we have a particular interest in it and in terms of legacy debt we want to see it done. However, it is important to get it right in the long term. Europe, not Ireland, faces a big problem with its banking system. What if something suddenly happened to it next year? Nobody is sure where there will be problems. If something happened it would be better to have a European framework to deal with the problem. The short-term issue refers to the short-term banking problem, not so much in Ireland but in other countries. We must have a mechanism in place in order that we do not have continuing crisis.

Deputy Eric Byrne asked about Ireland's fiscal path and people claiming that austerity does not work. Last January I published a paper in a French journal that examined the history of major adjustments in Europe. Interestingly, in the 1990s Finland undertook a major adjustment programme, but there was no improvement in public finances.

In fact, they got worse for the first few years, but borrowing abroad improved dramatically. It is really only when one eases off on the fiscal adjustment that one sees the benefits. It is similar to the United Kingdom in the late 1980s and early 1990s, or Ireland in the 1980s, where the first two budgets of the coalition government between 1982 and 1987 were really tough - probably tougher than anything we have seen in the current crisis - but they eased off after that. One did not see the benefits, or the fact that fiscal policy was being improved. There was very little progress. Once one eases off, one sees the adjustments. It is only when we have largely completed the adjustment - and if Europe recovers - we will see recovery here. Austerity works in terms of getting one's public finances right, but one does not see the benefits quickly.

Deputy Eric Byrne asked what we can do to create jobs. We must do what we have to do, and I published something yesterday on this issue. One thing we did not address, which my colleagues and many others have thought about, is how one does it in a smart way which is more employment-friendly. One of the things we recommended, which is being implemented and is generally accepted, was a move to property tax. We have to raise taxes somewhere. Property tax is better than taxes on incomes and it is less negative to jobs, although it is pretty unpleasant. If we have to raise taxes, we must do so in a way that is jobs-friendly.

I refer to Irish Water. We are under-investing in water and should be investing more in it. Every cent we invest in water is a borrowing requirement and it is a drag on us. If we manage to set up Irish Water as an independent entity like the ESB, which is not part of the Government accounts, can borrow on its own account and has revenue-raising powers so it covers all its costs from its bills - this is why we need water charges - then it is out of the Government accounts. If one capitalised Irish Water at €5 billion, to include €2 billion of Government equity, and if it was able to borrow €3 billion on the market to buy the assets, it could undertake a much bigger investment programme which would not be part of the Government accounts and would be fully funded by future charges on people, which would be very unpopular. However, there is a smart way to do this and we must think a bit more about that.